Last Tuesday the Office of Federal Housing Enterprise Oversight released its quarterly report on home price appreciation for the second quarter. Appreciation for the quarter was 1.17%, or 4.68% annualized. This is down from 2.2% (8.78% annualized) for 1Q06. The quarterly rate is the lowest rate of appreciation since the fourth quarter of 1999's 1.12%. The regulator also noted that the decline in the quarterly rate over the past year (from 3.65% in 2Q05) is the sharpest since it started the survey in 1975. In the latest report, five states - Maine, Massachusetts, Indiana, Ohio and Michigan - recorded negative home price appreciation for the quarter. This compares to only one state (Iowa) in the quarter release.

On a year-over-year basis, home prices were 10.06% higher in the second quarter compared to 12.77% in the first quarter. All states recorded year-over-year gains; however, many are down sharply from the previous report. For example, while Arizona continued to show the greatest home price growth from 3Q05 through 2Q06 at 24.1%, it was down from 32.8% reported in the year-over-year period for the first quarter. Florida remained the second fastest in year-over-year price growth at 21.3%, down from 26.6% in the previous report. Meanwhile, Hawaii dropped to 18.1% home price growth compared to 25% in the first quarter.

In terms of second quarter price growth, New Mexico recorded the strongest gain at 4.22% compared to 2.8% for the first quarter. Oregon and Idaho were the next highest at 3.99% and 3.78%, respectively.

The OFHEO analysts said the dramatic declines in price appreciation rates - with the greatest declines generally occurring in those states that have recently experienced the greatest price appreciation - have caused the higher interest rates that have contributed to a drop in speculative activity and greater inventory levels. The OFHEO's Chief Economist Patrick Lawler believes that the high level of inventories "will continue to constrain future appreciation rates."

Freddie Mac also released its quarterly survey on home price growth last Wednesday. The GSE reported similar results to the OFHEO's report. According to Freddie Mac's report, second quarter growth was 1.2% for an annualized rate of 4.9%, down from a revised first quarter rate of 9.1% annualized. Freddie Mac's Chief Economist Frank Nothaft said that over the period, 30-year fixed mortgage rates rose nearly 50 basis points and rates on one-year ARMs were up around 30 basis points. "Housing is the most interest-rate sensitive sector of the economy and we are seeing the effects now of both rising rates during the quarter as well as increase that came before," he stated. For the year-over-year period beginning in 3Q05 through 2Q06, home prices were up a respectable 10.2%.

By region, the East, South, and Central states recorded the highest level of home-value appreciation for the quarter at 2%, or 8.3% annualized. States in this region include Alabama, Kentucky, Mississippi and Tennessee. Arkansas, Louisiana, Oklahoma and Texas were next at 1.9% quarterly growth, or 7.8% annualized. Freddie Mac attributed the favorable growth levels in these two areas of the country to higher energy prices that have created a new boom in many towns.

On the opposite end, the New England division reported just a 0.2% increase (less than 1% annualized) for the quarter, actually doing slightly worse - albeit just slightly - than the area of Illinois, Indiana, Michigan, Ohio and Wisconsin. This area saw second quarter growth of 0.3%, or 1.2% annualized. The GSE suggested that the slowing in home price growth in New England could be partly related to a fall in demand for second homes. For example, Maine has the highest share of second homes in the country. Contributing to the slow growth in the Great Lakes area are job losses in manufacturing, according to Freddie Mac economists.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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